TOKYO -- A measure in Japan to combat tax dodging now threatens to have unintended consequences by penalizing companies with U.S. operations.
To prevent the abuse of overseas tax havens, Japanese companies must pay taxes on the earnings of any paper units overseas that are subject to an effective rate below 30% where they are based. Cuts under President Donald Trump put almost every American state under this threshold. The effective tax rate in California has dropped to 27.86% from 40.75%, for example.
Enterprises usually create special-purpose companies for each major project in the U.S., such as shale gas development or power plant construction, with separate limited-liability companies under them dealing with different aspects of the business, like risk management or compliance.
The practice is commonly used in the U.S. for asset protection and risk mitigation. But LLCs are paper companies as far as Japanese authorities are concerned, and trading houses and real estate developers that have long operated in America worry about how the new rates will affect their tax bills.
In response, the Ministry of Finance here is thinking about adjusting the rules to take into account an enterprise's overall operations abroad instead of making case-by-case decisions on each paper company involved. It will start talks with the ruling Liberal Democratic Party later this month and aims to incorporate the change into LDP tax reform guidelines for fiscal 2019.
For convenience, "every big Japanese trading house has set up hundreds of LLCs in the U.S.," a member of the Japan Foreign Trade Council said. Seeing them suddenly taxed in Japan as well would deal a heavy blow financially, not to mention the administrative work of filing returns in two countries.
The added complexity could even discourage acquisitions of American businesses. The Finance Ministry wants to ensure that new developments do not force Japanese companies to scale back their presence in the U.S.